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What Changed in Swiss Gold Banking?

By: Adrian Ash | Wednesday, February 6, 2013

What the Swiss banks' move away from unallocated accounts says about gold,
and about banking...

Imagine you could sell someone something, but keep ownership of it, and then
use it yourself, writes Adrian Ash at BullionVault.

You could lend it out for interest, say, or raise loans of your own by pledging
it as collateral. Or even sell it to raise cash when things get tight. And
if your business fails entirely, the "owner" will just have to cue up with
all of your other creditors, and be thankful with whatever small change is
paid out by the courts.

This is pretty much what big banks get away with in gold - or they did. Now
Swiss banking giants UBS and Credit Suisse are changing their gold-account
fees for big, institutional clients. The aim is to discourage other institutions
from keeping gold with them like this - so-called "unallocated gold". It looks
a lot like putting cash on deposit. The bank gets to own it, and so it gets
to go banking with the value as well. But now the business of selling gold
but without selling anything no longer pays.

And if you can't make a return from that, what hope is there for big banking
bonuses in 2013 or beyond?

You might wonder, as I did, if this news has something to do with the collapse
of gold interest rates...

...but as you can see, there hasn't been much money to make in lending out
gold - whether it belongs to you or not - for nearly a decade now. Yes, the
collapse in cash interest rates played a part in that switch. (The returns
above are what a gold lender makes after paying a borrower to take it away,
receiving the gold's cash value in return, and then lending out that money
instead. Just another oddity of the gold market.) But the slump in lease rates
came as gold miners stopped borrowing gold, selling it for fear of further
price falls, and instead began expecting higher prices for their future output.
And lending was never really the point of unallocated gold accounts at the
big banks anyway.

Instead, from what our friends in gold banking and Swiss bullion storage tell
us, the big banks were keen to get big piles of shiny metal which they could
then show to regulators. "Look, all this belongs to us, and not to clients," they
could say, before going out and banking with it - investing, borrowing and
lending with that weight of highly liquid, instantly priced bullion behind
them. Or at least, banking with a hefty part of its value.

Most especially in Switzerland, the big banks gathered such unallocated
gold from their smaller competitors - those private Swiss banks caring
for very wealthy customers, but lacking the secure, underground gold vaults
which such well-heeled clients might expect. Perhaps the big banks could
help? Sure they could. But only if a chunk of the client's gold wound up
on the big bank's balance sheet too.

Whatever the proportion of allocated to unallocated gold, this meant confusion
for any private-bank customer wanting to own his or her metal outright. Because
the bullion was now split between the big bank's balance sheet and the private
bank's own account in the vault. So the actual client was a long way from fully
allocated. Come a banking crisis - not that such things ever happen of course,
until they do - he or she would most likely find themselves exposed to not
one but two Swiss institutions.

Now, if this unallocated gold trail hadn't existed, neither would BullionVault today.
Paul Tustain founded it in 2003 precisely because of the confusion - and risks
- he encountered when trying
to buy gold for himself a year earlier. The Financial
Times, which broke the new move last week, explains the background:

"Under the more common 'unallocated' gold accounts, depositors' gold appears
on banks' balance sheets. [But as regulations change, that is] forcing them
to increase their capital reserves."

Just as with any loan the bank takes in - including household and business
deposits - it has to match at least some of that debt with ready cash. Or rather,
with reserves held at the central bank. This was always the way, but 2013 sees
new regulations - aka Basel III - raise the requirements to try and avoid a
repeat of 2007 and all that. Before now, offering unallocated gold at least
put bullion onto the bank's balance sheet. But with these new regulatory hassles
and thus costs (money unlent is dead money to banks, remember) unallocated
gold has suddenly become lose-lose to the banks.

This marks a big shift in the banks' provision of gold, and there is more
on this to come no doubt. Such as how the Swiss giants - who provide a lot
of gold-vaulting to the smaller Swiss private banks - are actually raising
their unallocated fees by 20%, as the press report. Unallocated gold shouldn't
cost you an ongoing fee, because why would you pay to store something which
isn't yours? On the other side, according to Dow
Jones' report, they are actively cutting their allocated storage fees too.
Suggesting perhaps that either they'd like to get the private-banks' clients
directly. Or they've got a lot more spare capacity in Swiss vaulting than earlier
press reports would suggest.

Either way, private savers trying to hide out in gold aren't likely to see
vaulting fees drop. Swiss private banks charge 1% and more per year to their
clients, and a 1/100th of a per cent drop in their costs is unlikely to show
up in their "retail" pricing. (BullionVault is
best-value worldwide, by the way, at 0.12% per year for specialist non-bank,
fully allocated storage in your choice of Zurich, New York or London.)

So for now, this change simply marks another key stage for gold and for banking.
One is making a long return as a core asset to be owned outright. The other
is struggling to cream off the kind of fat margins which once paid so well.

Formerly City correspondent for The Daily Reckoning in London and head of
editorial at the UK's leading financial advisory for private investors, Adrian
Ash is the head of research at BullionVault,
where you can buy gold
today vaulted in Zurich on $3 spreads and 0.8% dealing fees.

About BullionVault

BullionVault is the
secure, low-cost gold and silver exchange for private investors. It enables
you to buy and sell professional-grade bullion at live prices online, storing
your physical property in market-accredited, non-bank vaults in London, New
York and Zurich.

By February 2011, less than six years after launch, more than 21,000 people
from 97 countries used BullionVault,
owning well over 21 tonnes of physical gold (US$940m) and 140 tonnes of physical
silver (US$129m) as their outright property. There is no minimum investment
and users can deal as little as one gram at a time. Each user's unique holding
is proven, each day, by the public reconciliation of client property with formal
bullion-market bar lists.

BullionVault is a
full member of professional trade body the London Bullion Market Association
(LBMA). Its innovative online platform was recognized in 2009 by the UK's prestigious
Queen's Awards for Enterprise. In June 2010, the gold industry's key market-development
body the World Gold Council (www.gold.org)
joined with the internet and technology fund Augmentum Capital, which is backed
by the London listed Rothschild Investment Trust (RIT Capital Partners), in
making an $18.8 million (£12.5m) investment in the business.

Please Note: This article is to inform your thinking, not lead it.
Only you can decide the best place for your money, and any decision you make
will put your money at risk. Information or data included here may have already
been overtaken by events - and must be verified elsewhere - should you choose
to act on it.